Predictions about economic recovery in global resources markets
are plentiful - unfortunately, they are not particularly
consistent. The only certainty about when and how recovery will
occur and what recovery will look like is that it is uncertain.
Hourly speculations about the factors that affect commodity prices
(or speculations about the factors themselves) are fuelling a price
volatility that is increasingly divorced from the underlying
fundamentals. Right now commodity prices are less about the
economic fundamentals of supply and demand and more about
addressing financial' market requirements, geopolitical
concerns and the climate change imperative. The impact of all of
this on Canada's energy sector has been profound, far reaching
and unprecedented. What the industry looked like in 2014 is not
what the industry looks like today, nor what the industry will look
like tomorrow. The changes are many and varied and this article
examines three of them: firstly, the flight of resource capital
from Canada, secondly, the redefinition of the junior resources
sector, and finally, the closing of the current window of
opportunity to become a player in global LNG markets.

Investment capital takes flight

Investment dollars in Canada's energy sector are moving
south. Canadian products are constrained by a lack of access to
markets outside Canada. The US, once our customer, is now our
largest competitor. Obtaining approval of new energy infrastructure
projects in Canada, particularly pipelines, has become increasingly
difficult; with the result being that access to more lucrative
global and international markets is constrained. Until such access
becomes available, Canadian products will continue to be subject to
a discount on already low global and North American commodity
prices.

In the meantime, investors and companies looking for growth in
the energy sector have started to reallocate their investment
capital from Canada's energy sector into international markets.
Encana Corporation started looking south in 2014 with its US$3.lbn
Eagle Ford acquisition, and since that time, its acquisition of
additional US natural resources assets and its disposition of
significant Canadian resources assets. And it hasn't looked
back. In August 2015, Canada Pension Plan Investment Board, a
significant investor in Canada's energy sector, acquired US
based Antares Capital for US$12bn. In September 2015, Emera Inc.,
an energy and services company headquartered in Halifax, Nova
Scotia, acquired TECO Energy, a US energy related company, for
approximately US$lO.4bn, reducing its Canadian assets to only 23
percent of its portfolio. In February 2016, Fortis Inc, a leader in
the electric and gas utility business, acquired ITC Holdings Corp.,
a US based energy infrastructure company, for approximately $US
Il.3bn in furtherance of its stated objectives to possess
significant growth assets. In March 2016, Trans Canada Corporation
completed its acquisition of Columbia Pipeline Group for
approximately $US13bn acquiring (rather than constructing)
additional pipeline assets to grow its business. Finally, in
September 20 16, Canadian based Enbridge Inc. and US based Spectra
Energy Corp. agreed to combine in a US$28bn stock deal to create
the largest energy infrastructure company in North America
fulfilling Enbridge's stated objective of diversifying and
expanding its sources of growth beyond 2019.

By contrast, big deals in Canada, other than Suncor Energy
Inc.'s acquisition of additional oil sands assets from two of
its joint venture partners in the Syncrude oil sands project, have
been few and far between.

Intermediate is the new junior

In prior years, Canada depended on its vibrant junior oil &
gas sector to accelerate recovery from down markets. All that was
needed was readily available capital from banks and a capable and
experienced management team. In today's environment, that no
longer works. Players in the junior sector have been
disproportionately affected by the low-price commodity environment.
Cash flow from operations is often insufficient to meet operating
expenses and drilling programmes have been significantly cut back.
Reserve values and reserves are both decreasing - not only as a
result of lower commodity prices but also as a result of lack of
investment. Canadian banks are suffering losses and looking at ways
to reduce their exposure to the energy sector. At the end of each
quarter, junior and intermediate exploration and production
companies are seeing a reduction in the borrowing bases for their
reserve based lending facilities, further exacerbating their
financial woes. Since reserve based lending is the most critical
source of capital for junior exploration and production companies,
the inability to finance operations from that source of debt
capital has had a significant impact on the junior sector. The cost
to 'start small' is just too high. And the
'reward', at least for North American private equity
investment in the junior oil & gas sector in Canada, is just
too small

In this environment, most junior players do not have the
financial ability to participate in the current unconventional
resources growth plays in western Canada, like the Montney shale.
These plays are capital intensive and drilling programmes are
technologically complicated and challenging. New industry realities
mean that 'juniors' will need to be bigger, stronger and
more financially sound if they want to attract funding from the
sources of capital that are available to them.

Closing the blinds on LNG in Canada – almost

One of the biggest missed opportunities for Canada is the
development of a globally competitive liquefied natural gas (LNG)
industry along British Columbia's west coast. This is as much a
result of the global resource meltdown as the inability of Canadian
companies to obtain regulatory approval of large scale
infrastructure projects. In 2014 there were more than 20 proposed
LNG projects for up to 250 mtpa of LNG capacity being proposed
along British Columbia's west coast. By the end of 2014 and
throughout 2015, several projects were deferred or cancelled. Two
promising large scale projects were set to make a final investment
decision in 2016 - Shell Canada sponsored 'LNG Canada', a
joint venture with China National Petroleum Corporation, Mitsubishi
Corporation and Korea Gas Corporation for up to a four train 24
mtpa LNG project; and the Petronas led 'Pacific Northwest LNG
Project' , a joint venture among Progress Energy Ltd., a
wholly-owned subsidiary of Petronas, Sinopec, JAPEX, Indian Oil
Corporation and Petroleum Brunei for up to an 18 mtpa LNG
project.

The LNG Canada project was the farthest project along in terms
of regulatory approvals. However, in February 2016 LNG Canada
announced that it would delay a final investment decision until the
end of 2016 to ensure that the project was economically viable in
the current environment. In July 2016, Shell announced that the
final investment decision planned for the end of 2016 would be
deferred to an indeterminate future date.

The Pacific Northwest LNG project is the last remaining large
scale LNG project that has yet to be deferred or cancelled. The
proponents made a conditional final investment decision in 2015
pending receipt of federal environmental approval. After several
regulatory delays, the project received federal environmental
approval of its project on 28 September 2016. However, despite the
earlier conditional final investment decision, the future
development of this project is uncertain. There are 190 conditions
attached to the federal environmental approval, including the first
ever maximum cap on C02 emissions. Petronas has stated that in
light of the 190 conditions and the current economic climate, it
will review the project to determine whether it remains
economically feasible before it makes a final investment
determination.

The global energy industry generally, and the Canadian energy
industry in particular, has seen very significant structural and
cyclical changes in a very short period of time. Unfortunately, the
long-term implications will only truly be understood in
hindsight

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